Three important mortgage rate shopping tips
You’re smart. You know that rate shopping will get you the best deal. But how do you know that you are doing it correctly and in the most effective way? After all, there are all kinds of sites that tell you that “Lenders are competing for your business, which means you get the most competitive offers,” like Lending Tree, but are they really? You might want to read this article next.
There’s only one tried and true way to get results from rate shopping, and we share it here. It doesn’t have to be time consuming, it doesn’t have to be complicated, you just need to follow this simple process.
1. Quickly figure out the range of offers you might qualify for
An easy way to figure out what you qualify, without compromising your own personal information through spammy sites, is to visit the Consumer Financial Protection Bureau’s (CFPB) amazing interest rate tool.
The reason this is such an amazing place to start is that they have aggregated real data from around the country to come up with rates you can expect to find, based on type of loan, state, and credit score. You can’t get much more customized and accurate than that!
Most other sites that aggregate rates are really just serving up ads from mortgage companies and all of these have in the fine print the words “non-binding” or something equivalent. These are teaser rates, designed to lure you into the process. The mortgage companies that post them have an incentive to make them as unnaturally low as possible – so that you click. Avoid all of those shenanigans but going directly to the CFPB interest rate site.
2. Compile a list of loan officers and get specific information
Once you have an idea of what you qualify for, you aren’t totally beholden to a loan officer to determine your future. Now it’s time to collect enough loan officer’s phone numbers and emails so that you can truly, effectively do rate shopping. You should have at least three loan officers ready to dial, ideally four.
Make sure you have at least one mortgage broker in the mix. Mortgage brokers have access to many different mortgage products, whereas a bank or mortgage banker only has access to a more limited range of products.
Get a complete quote, which consists of the following: type of product (e.g. 30 yr fixed, etc.), interest rate, loan amount, lender fee, appraisal fee. The reason that you want to make sure you collect all of this information is that sometimes a loan officer will only quote a product, interest rate, and loan amount. This leaves off fees, and without fees, you cannot effectively rate shop, simply because you don’t have enough information!
Now, in the case of an adjustable rate mortgage (ARM), you’ll want to make sure you have additional information, including lifetime max interest rate, yearly interest rate caps, index and margin (for more information on these terms, please see this page).
If you have an FHA or a conventional mortgage where you are putting less than 20% down, you’ll also want to ask for what the amount is for your mortgage insurance, as this is yet another fee that you’ll need in order to do effective rate shopping.
3. Compare quotes!
Now, you have real, complete quotes. In order to determine which quote is the best, you’ll want to look at a few factors. First, figure out how long you believe you’ll stay in your new home. The reason this is important is because some offers make more sense the longer you stay in the home, and some make more sense if you are staying in your home a shorter amount of time. Once you determine how long you expect to stay in your home, you’ll want to see which loan is the least expensive for that time frame by adding up all of the costs you will incur during that time frame for each loan.
But, that’s not the only factor!
You’ll want to also look at how much equity you will build with each quote during the timeframe you expect to stay in your home. Most home buyers don’t think too much about equity, but, you’re already interested in rate shopping, which means that you are savvier than most!
Equity is built by the amount of principal that is paid back every month, plus your down payment. Out of each mortgage payment, part of the payment is interest and part is principal. The interest portion just goes to the bank while the principal portion is applied to the amount you owe on the loan. Obviously, the more principal you pay, the more equity you’ll have, which is the portion of your home which is YOURS, not owed to the bank. Confused? Watch this short video on equity to learn more.
So, before you simply rate shop by comparing costs, also sort your options by how much equity you’ll have. After all, equity is part of your net worth. Very important, indeed!